state aid

‘Competitors’ Challenges to the Merits of a State Aid Decision is a Tough Nut to Crack, the Scor (Court) Case Reminds Us’

1. Background:

Back in 2013, Scor SE (“Scor”), whose subsidiary is engaged on the French market for the reinsurance of risks relating to natural disasters, lodged a complaint with the European Commission alleging unlawful and incompatible State aid in favor of Caisse Centrale de Réassurance (“CCR”). CCR is a public undertaking of reinsurance whose core activity concerns the reinsurance of risks relating to natural disasters in France and benefits from an unlimited State guarantee to the extent certain of its activities are concerned.

Unlimited public guarantees granted to undertakings are generally incompatible with EU State aid law. As the European Commission pointed out in its Guarantee Notice,[1]guarantees must be linked to a specific financial transaction, for a fixed maximum amount and limited in time. In this connection the Commission considers in principle that unlimited guarantees are incompatible with Article [107] of the Treaty.”

Departing from the aforementioned Notice and its decisional practice, the Commission, after having reviewed the measure in Phase I, dismissed Scor’s complaint and declared compatible, in decision C(2016) 5995 final of September 26, 2016 (the “Decision”), the unlimited guarantee in favor of CCR. The Commission considered that this guarantee was essential for the French regime for indemnification of natural disasters and pursued an objective of national solidarity in the face of risks related to natural disasters, and that it was necessary and proportionate in light of this objective and of limited disturbance on competition and interstate trade.

On May 6, 2019 the General Court of the European Union (“General Court”) dismissed the action in annulment that Scor introduced against the Decision (case T‑135/17 or the “Scor Court case”).

2. Interesting features of the Scor Court case:

It is not really its contribution on State aid substantive issues that makes this case interesting; it is rather that it reminds us of the difficulties facing companies willing to challenge the merits of a State aid decision that benefits a competitor (in this case, a compatibility decision to the benefit of CCR).

●   Legal standing to challenge a State aid compatibility decision on the merits

Referring to the landmark Plaumann case (Case 25-62), the General Court recalled that for Scor (as a non-beneficiary third party) to have standing to challenge the Decision on the merits, it had to demonstrate that it was “individually concerned,” i.e. affected by the disputed decision by reason of certain attributes peculiar to it or by reason of circumstances that differentiate it from all other persons and, by virtue of these factors, distinguish it individually just as in the case of the addressee.

To pass this test, the General Court traditionally considers that it is not enough for the applicant to be a competitor. The applicant must demonstrate that the disputed decision substantially affected its position on the market.

Hence the difficulty lies in what “substantially affected” shall mean.

We know from precedents, and this is emphasized once again by the Scor Court case, that the mere fact that a measure may exercise an influence on the competitive relationships existing on the relevant market and that the undertaking concerned was in a competitive relationship with the recipient does not suffice.

Rather, the criterion of substantial affectation of the applicant’s market position requires to be demonstrated by specific circumstances, such as: significant decline in turnover, appreciable financial losses or a significant reduction in market share following the grant of the aid in question, loss of an opportunity to make a profit or a less favorable development than would have been the case without such aid.

Hence it is easy to understand why this criterion can constitute a serious obstacle for competitors willing to challenge a State aid decision on the merits. It is even more true when one considers that, in the finding of State aid, the Commission generally does not devote too much effort to the demonstration of the affectation of competition resulting from the aid. One may regret this, as it would be very helpful (let alone for the concept of State aid) to find more developments in that regard.

In the case at hand, the General Court, following a two-step analysis, first identified the market concerned by the dispute (i.e. the French market for the reassurance of risks caused by natural disasters). It then went on to examine the circumstances put forward by Scor to demonstrate legal standing, namely: its subsidiary’s modest size on the market concerned (i.e. 0.08-0.11% – figures criticized by the Court for not being contemporaneous to Scor’s application) compared with its position on other French reinsurance markets (around 8-13%), as well as its complainant status and active role in the course of the proceedings. Regarding the first circumstance, the General Court took the view that Scor had failed to provide evidence of a potential link between the State guarantee to CCR and the particularly low level of Scor’s subsidiary’s market share on the French market for the reassurance of risks caused by natural disasters. As for the second circumstance, the complainant status and the active role played in the proceedings was recognized as a circumstance to account for, but it was said to be insufficient in itself to prove legal standing. The General Court consequently rejected, as inadmissible, Scor’s pleas challenging the merits of the Decision.

However, it declared admissible Scor’s pleas pertaining to the protection of its procedural rights, applying here again a well-established case-law according to which any “interested party” may claim protection of its procedural rights before the EU judge in relation to a decision not to raise objections or a non-aid decision.

●   Types of arguments left for competitors to challenge a State aid compatibility decision as illustrated by the Scor Court case

Competitors are easily deemed to be “interested parties,” i.e. “any person, undertaking or association of undertakings whose interests might be affected by the granting of aid …” (Article 1 of Regulation 2015/1589). But, then, as recalled by the General Court, the scope of their pleas is much more limited than if they were Plaumann-applicants, as they can only claim violation of procedural rights.

Applying this principle in the Scor Court case, the Court hence accepted to examine Scor’s pleas only on the failure to state reasons (an issue of public policy that EU courts must raise on their own motion), and on the violation of its procedural rights.

In that regard, Scor alleged that there were serious doubts as to the compatibility of the Decision, which should have led the Commission to open formal proceedings (phase II), i.e. long duration of the administrative proceedings; Commission’s hesitation on the legal basis for the Decision; the fact that a potential alternative system was envisaged; indications in the content of the Decision demonstrating serious doubts: failure to state reasons, insufficient and incomplete investigation, greater focus on the compatibility than on the existence of aid, no review of Scor’s proposal for alternative systems, misunderstanding by the Commission of the functioning of the guarantee, various circumstances raising doubts about the proportionality of the aid).

But, after addressing each of them in turn, the General Court eventually rejected all these arguments.

If, to some extent, procedural arguments may have a connection with the merits (in particular, the Court may examine substantive arguments to the extent they tend to support a procedural plea), it goes without saying that they are rather weak weapons and cannot compensate for the inadmissibility of substantive pleas. This can understandably leave the competitor-applicants frustrated when they do not manage to successfully pass the Plaumann test.

Furthermore, even in cases where pleas on the violation of procedural rights succeed, this does not necessarily mean that the measure at stake would ultimately be declared incompatible aid, as the Commission may comply with the requirements set out in a judgment without having to declare the measure incompatible.

At a time of increasing calls for enhanced private enforcement in the State aid space and when it is duly acknowledged that “State aid (…) directly harm[s] the interests of other players in the markets concerned, who do not benefit from the same type of support” (emphasis added) (see the 2019 Recovery notice), one may wonder whether it should not be necessary to revisit traditional principles about legal standing of competitors when it comes to challenging the merits of compatibility or non-aid decisions.

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[1] Commission Notice on the application of Articles 87 and 88 of the EC Treaty to State aid in the form of guarantees (2008/C 155/02).

A New Twist in the Micula Case

The Micula case refers to what started as an intra-EU arbitration dispute between two Swedish investors and Romania and might end—or not—as a State aid case. After the recent EU judgment of June 2019, which marks a new twist, the fate of this case from a State aid perspective remains at least partially undecided.

Background of the Micula case

In the late ’90s, the Romanian government wanted to attract investors to help Romania’s economy grow, especially in the poorer regions of the country. To do so, it inter alia enacted the Emergency Government Ordinance 24/1998 (“EGO 24”) later amended by Emergency Government Ordinance 75/2000 (“EGO 75”) which made available certain tax incentives to investors in certain disfavored regions of Romania and was expected to last 10 years.

Relying on this favorable scheme, the Micula brothers, two Swedish nationals, invested heavily in the Ştei-Nucet Drăgăneşti region in northwestern Romania.

However, in 2005, on the eve of its accession to the EU, Romania abolished almost all the tax incentives in an effort to comply with the EU acquis communautaire and especially State aid rules.

The Micula brothers brought a claim against Romania grounded on the violation of the “fair and equitable treatment” clause of Article 2§3 of the Sweden-Romania Bilateral Investment Treaty (hereafter, “BIT”) before an arbitral tribunal. The EU Commission intervened as amicus curiae in these proceedings. In essence, its position was that the EGO 24 incentives constituted incompatible State aid, and that any ruling reinstating the privileges or compensating for their loss would lead to the granting of new aid incompatible with the Treaty on the Functioning of the European Union. In 2013, the arbitral tribunal ruled in favor of the Micula brothers and ordered Romania to compensate the tax break losses for the 2005–2009 period for an amount of EUR 178 million, interest included.

Two years later, in a 2015 decision, the EU Commission found that the implementation of the compensation award by Romania was in breach of EU State aid rules. The Commission thus ordered full recovery from the Micula brothers.

This decision was appealed before the EU General Court which issued its judgment on June 18, 2019.

The General Court ruling

When traditional principles of law enforcement over time are called to the rescue

The claimants argued the Commission’s lack of competence and the inapplicability of EU law to a situation that predated Romania’s accession to the EU.

The General Court generally endorsed their arguments. It first pointed that EU law became applicable in Romania only after its accession to the EU on 1 January 2007, at which date the Commission acquired competence to apply EU rules to Romania. The General Court then determined that the date on which the alleged aid was granted was the date on which the right to receive compensation was acquired, i.e., the date of revocation of EGO 24 (2005). The General Court emphasized the irrelevance of the compensation award issued in 2013, after Romania’s accession to the EU, as it was simply a recognition of that right.

On this basis, the General Court concluded that the EU Commission had no jurisdiction over the amounts granted as compensation for the 2005–2007 period and exceeded its powers in State aid review by addressing the issue of damages without distinguishing the periods before or after accession.

Impact on the inapplicability of EU law to the State aid issue

On the substantive issue, there was not much left for the EU General Court to decide after the finding of inapplicability of EU law to the compensation for the period predating accession. After having recalled the well-established case law according to which compensation for damage suffered cannot be regarded as aid unless it has the effect of compensating for the withdrawal of unlawful or incompatible aid, the General Court logically concluded that the compensation of the withdrawal of EGO, at least for the period predating accession, could not be regarded as compensation for withdrawal of unlawful or incompatible State aid.

As the disputed decision failed to distinguish between compensation for the period predating accession and post-accession, the Court annulled the Commission Decision (EU) 2015/1470 of 30 March 2015 in its entirety.

Conclusion

While the General Court rightly quashed the EU Commission’s tendency to overly assert its competence when it comes to the State aid space, one may regret that the judgment does not address the substantive State aid issue at stake. The question of whether compensation of the withdrawal of EGO for the post-accession period constitutes State aid is hence cautiously left open by the General Court. Therefore, this judgment may possibly not put an end to the Micula saga as the EU Commission may not have had its last word.

This case, combined with the now-famous Achmea case, which has rung the death knell of investor-state arbitration clauses contained in intra-EU BITs[1], shows the potential difficulties that investors, which are incentivized by public measures, may face when they invest within the EU. Indeed, at the end of the day, they are the only ones to really bear the State aid risk and face the consequences of recovery, with relatively limited possibilities for legal recourse. This case shall remind those investors to carefully address the issue of potential State aid as part of their overall legal risk assessment.

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[1] See Declaration of the representatives of the governments of the Member States of 15 January 2019 on the legal consequences of the judgment of the Court of Justice in Achmea and on investment protection in the European Union.

EU State Aid Tax Ruling Cases: Not Yet the End of It?

More than a couple of years ago, a lot of fuss was made around the first string of State Aid tax rulings cases of the European Commission (Starbucks, Fiat, Apple, the Belgian scheme relating to the excess profit of multinational companies). Everyone has indeed heard about the massive amounts of State Aid, sometimes wrongly qualified by journalists as “fines”, that the European Commission ordered various EU Member States to recover from companies having benefitted of reportedly special and preferential tax treatment (e.g., up to €13 billion from Apple in the Irish tax ruling case).

At the time, some pretended that the approach taken by the European Commission was totally unheard of and that it was just another way for the European Commission to harass large U.S. companies.

They were not quite right.

The approach taken by the European Commission undoubtedly hinges on old precedents and on the European Commission guidance on the application of the State Aid rules to measures relating to direct business taxation (1998). What seems true however is that the European Commission, experiencing political pressure from the European Parliament in the aftermath of LuxLeaks, may have sometimes acted in haste at the cost of a lack of robustness of the underlying legal reasoning. The first setback suffered by the European Commission before the EU judge (annulment of the decision against the Belgian scheme relating to the excess profit of multinational companies) or the early closure by the European Commission (without any in-depth investigation) of the case against the Luxembourg tax ruling in favor of McDonald’s, tend to illustrate this point. But these findings do not equally apply to all tax ruling cases (about ten cases). It goes without saying that not all the tax rulings cases will come to a happy ending for beneficiaries. The case against Gibraltar which decided not to appeal the European Commission’s decision ordering recovery of €100 million of unpaid taxes from multinational companies is a good counter-example.

To see the bright side, the refined analytical grid which will soon emerge from those cases will at least help the EU Member States and (actual or potential) beneficiaries of tax rulings within the EU to better assess their own risks.

Why is it important to keep an eye on these developments?

  • There may still be a few more State Aid cases to come regarding tax rulings. Since the beginning of 2019, no less than two new investigations have been launched by the European Commission (Nike, Huhtamäki). They signal that some rulings are still under review;
  • The financial stakes may be high;
  • The time limitation period for the European Commission to order recovery of the aid is 10 years; and
  • Should the aid be deemed unlawful and incompatible, State Aid recipients bear in fine the risk of recovery.

That said, it remains difficult to predict what the next cases will be. Part of the answer probably lies with the statements of Commission’s officials who suggested that the European Commission would prioritize what it would perceive as the most caricatural cases.

It would however be surprising if this was to remain at the heart of the European Commission’s State Aid priorities once it has exhausted its current stock of rulings (those made known in the context of LuxLeaks, Panama Papers or Paradise Papers or those requested from the EU Member States in the years 2013-2014). With the State Aid cases that prompted changes of practices from EU Member States and the new legislative safeguards (e.g., EU Directive 2016/1164 laying down rules against tax avoidance practices that directly affect the functioning of the internal market to be transposed by EU Member States this year), one may indeed reasonably think that the State Aid tax rulings subject will gradually lose its topicality…at least until the next tax scandal.

European Commission Puts the Boot into Spanish Football Clubs

On 4 July 2016, just as European football takes centre stage at the final stages of the UEFA European Championships in France, the European Commission (“Commission”) issued a decision ordering Spain to recoup tens of millions of euros of unlawful State aid granted to seven Spanish football clubs, including two of the best-known clubs in the world, Real Madrid and FC Barcelona.

The Commission’s probe was launched in December 2013, with three parallel investigations into certain public support measures granted to Real Madrid, FC Barcelona, Athletic Club Bilbao, Club Atlético Osasuna, and three Valencian football clubs, Valencia CF, Elche CF and Hercules CF.

“Protect the level playing field”

In announcing the rulings, Margrethe Vestager, Competition Commissioner, stated: “Using tax payers’ money to finance professional football clubs can create unfair competition. Professional football is a commercial activity with significant money involved and public money must comply with fair competition rules. The subsidies we investigated in these cases did not.” The Commission’s press release cites its application of State aid rules in these investigations as “protect[ing] the level playing field” for competing professional football clubs against State measures that could “prevent rivals from growing and being competitive.

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